Credit: Image source: Getty Images.
Image source: Getty Images.
Global reach
Tiered royalties are very popular in the pharmaceutical industry. In this case, it's a matter of targeting each market according to what patients and insurance systems are able to pay.
The World Health Organization recommends a tiered royalty method when setting prices in the developing world. Crucial medications for life-threatening diseases like malaria or HIV/AIDS should start by determining their royalty rate in high-income markets. The rates from places like the U.S. and Germany are then adjusted for relative income per capita when setting prices in less prosperous countries. Furthermore, nations with particularly high disease burdens get an additional discount beyond what's normally a heavy per-capita income rebate.
This structure lets drug developers and medical device inventors recoup their development costs with large royalties in richer markets. At the same time, the benefits of their inventions are extended to places that cannot afford the first-world payments. The arrangement benefits the drug developers too: Places like Somalia and Suriname can generate a modest level of low-margin sales. Under the standard royalty rate, sales would be indistinguishable from zero in these markets.
These are just a couple of examples of tiered royalty rates and how they can boost business. Tiered structures allow the parties to tailor agreements to their specific market conditions. When this is done right, tiered royalties can boost overall sales while maximizing the resulting revenues and bottom-line profits.
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Anders Bylund owns shares of Universal Display. The Motley Fool owns shares of and recommends Universal Display. Try any of our Foolish newsletter services free for 30 days .
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